<THE EVENING NEWS>
Thursday, April 8, 1999
DJIA 10197.70 +112.39 (+1.11%) S&P 500 1344.00 +17.11 (+1.29%) Nasdaq 2573.39 +28.96 (+1.14%) Russell 2000 399.89 +2.12 (+0.53%) 30-Year Bond 97 3/32 +25/32 5.45 Yield
After today's heavily traded $16 1/4 rise to $37 1/2 is figured in, shares of local and long-distance telephone services provider MGC Communications (Nasdaq: MGCX) now sit more than 300% above their $9 closing price on Friday; the stock hasn't been above $10 since October. The move was propelled by Monday morning's news that MGC agreed to sell $47.5 million worth of series B convertible preferred stock to Providence Equity Partners and two current MGC shareholders in order to fund a move into high-speed data. The investment boosts Las Vegas-based MGC's cash position by nearly 40% to about $170 million, which will be needed to install the digital subscriber lines (DSL) the company hopes to spin into gold. In Providence, MGC has the backing of an experienced telecommunications investor: the company was a founding investor in Brooks Fiber, sold last year to MCI WorldCom (Nasdaq: WCOM), and Canadian competitive local exchange carrier (CLEC) MetroNet Communications (Nasdaq: METNF), which recently agreed to merge with AT&T's (NYSE: T) Canadian division.
With many enterprise software companies celebrating spring by pre-announcing disappointing first-quarter earnings brought on by difficult market conditions, security software maker Check Point Software (Nasdaq: CHKP) chose to zig instead of zag, telling investors it expects "strong results," meeting company expectations (Wall Street's consensus estimate is $0.44). "Demand for our products and services was strong" in Q1, according to CEO Gil Shwed, "and we have not experienced the difficulties which some of our competitors state are affecting their business." Shwed clearly felt the need to clear the air following this week's news emanating from the offices of companies like Network Associates (Nasdaq: NETA), Aspect Development (Nasdaq: ASDV), and Axent Technologies (Nasdaq: AXNT), all of which took big hits following earnings warnings. Perhaps in sympathy, shares of Check Point slid as low as $23 following last week's close of $39 1/2 per share. Check Point was up today $6 15/16 to $33 11/16.
QUICK TAKES: Casual clothing retailer Gap Inc. (NYSE: GPS) danced its way up $4 3/8 to $72 3/4 following news of March same-store sales that rose 21% over last year's levels... Office products retailer Office Depot (NYSE: ODP) bagged gains of $3 to $24 3/4 after announcing that its e-commerce site will be featured on America Online's (NYSE: AOL) various offerings. The marketing agreement is for one year... Discount and online brokerage JB Oxford Holdings (Nasdaq: JBOH), a recent Foolish Double, moved up $5 11/16 to $14 13/16 after it said in a conference call with analysts yesterday that it is optimistic about the prospects for the company and the industry in 1999. Competitor M.H. Meyerson (Nasdaq: MHMY) added $3 1/4 to $8 today, while National Discount Brokers (Nasdaq: NDB) got $9 3/4 to $46 1/4. Ameritrade (Nasdaq: AMTD) earned $10 3/4 to $105 1/2 and E*Trade (Nasdaq: EGRP) finished up $8 3/8 at $92 7/8.
Consumer information and data processing company infoUSA Inc. (Nasdaq: IUSAA), which announced a multiyear contract to license its business database to Dell Computer (Nasdaq: DELL), rose $1 13/16 to $7 7/8. Yesterday afternoon, infoUSA said it will start selling advertising on its website... Footwear retailer Shoe Pavilion (Nasdaq: SHOE) laced up $3/4 to $5 1/2 after announcing a direct link to its online store from iVillage Inc.'s (Nasdaq: IVIL) shopping channel. The company said Q1 sales were 24.5% over year-ago levels at $14.3 million, while same-store sales were off 1.5%... Construction products and services maker and marketer American Buildings Co. (Nasdaq: ABCO) added $13 1/16 to $34 15/16 after Canada's ONEX Corp. agreed to buy the company for $36 per share in cash, about a 65% premium to yesterday's closing price.
Drugstore giant CVS Corp. (NYSE: CVS) popped up $2 1/4 to $48 3/8 after Lehman Brothers analyst Meredith Adler upgraded the stock to "buy" from "outperform"... Natural gas processor and marketer Aquila Gas Pipeline Corp. (NYSE: AQP) piped up $1 to $8 today. Tomorrow, UtiliCorp United (NYSE: UCU) will launch an $8 per share tender offer for the 5.4 million shares of Aquila that it doesn't own -- about 18% of the current shares outstanding... Southwest Securities (NYSE: SWS) got $4 7/8 to $43 3/8 after its Sovereign Securities division officially changed its name to www.mydiscountbroker.com to improve brand recognition and visibility... Engineering and construction services firm Foster Wheeler Corp. (NYSE: FWC) built itself up $1 1/2 to $14 7/16 after starting work on a $15 million contract to provide engineering design for a Vietnam oil refinery.
High-bandwith telecommunications services company FirstCom (Nasdaq: FCLX) sped up $1 23/32 to $5 after announcing a campaign to become the leading Internet connection and services provider in South America... Telecommunications products and services company Westell Technologies (Nasdaq: WSTL) rang up gains of $1 13/16 to $5 3/4 after extending an agreement to provide Bell Atlantic (NYSE: BEL) with asymmetric digital subscriber line (ADSL) within five years. Bell also inked product agreements with Nortel Networks (NYSE: NT), up $8 1/8 to $76, and Alcatel SA (NYSE: ALA), ahead $7/8 to $24 7/8. Bell's shares picked up $1 7/16 to $55 3/16 today... Women's clothing retailer AnnTaylor Stores (NYSE: ANN) rose $1 9/16 to $49 1/8 after it said March same-store sales were up 21% from last year's levels.
Business communications solutions company AVT Corp. (Nasdaq: AVTC), which last night said it expects to report Q1 EPS of between $0.21 and $0.23, beating Wall Street's $0.20 mean estimate, finished up $2 3/4 to $21 5/8... Women's apparel retailer bebe stores (Nasdaq: BEBE) put on $2 5/16 to $43 3/8 after reporting fiscal Q3 same-store sales 26% above the year-ago period. Revenues were up 38% to $46 million... Furniture maker Bush Industries (NYSE: BSH) advanced $1 3/8 to $13 15/16 after it said it expects to meet analysts' Q1 EPS estimates before a $0.46 per share restructuring charge... Doors, windows, and millwork distributor Crane Co. (NYSE: CR), upgraded to "buy" from "neutral" by Salomon Smith Barney, closed ahead $2 5/8 to $27 1/16... Beauty products company Revlon (NYSE: REV) applied $1 5/8 to $25 3/16 on top of yesterday's $3 9/16 gain following news that it hired Goldman Sachs and Lazard Freres to advise it on "strategic alternatives."
Publishing company Primedia Inc. (NYSE: PRM), which produces 350 print titles including Seventeen and Soap Opera Digest, recorded gains of $3 3/8 to $16 15/16 following reports that the company is planning to establish two stand-alone Internet companies using content from its magazines... Internet software developer Spyglass Inc. (Nasdaq: SPYG) added $4 to $17 5/8 after gaining $4 3/4 yesterday on news of a three-year, $20 million licensing deal with software giant Microsoft (Nasdaq: MSFT). Today the company said it agreed to buy California's Navitel Communications, a privately held company that develops Microsoft Windows CE-based software and applications platforms for Internet enabled telephones... Contract offshore drilling company R&B Falcon (NYSE: FLC) took $3/4 to $7 3/8 after Morgan Stanley Dean Witter upgraded the shares to "outperform" from "neutral." Yesterday the stock lost $7/8 on news that Steven Webster will step down as president and CEO on May 31 to be replaced by Chairman Paul Loyd, Jr.
Managed health care organization Humana (NYSE: HUM) sank $4 to $12 3/16 after warning that higher medical cost trends will result in Q1 EPS between $0.20 and $0.24, compared with the First Call mean estimate of $0.34. The company also said it will take a $90 million charge in the quarter to boost medical claim reserves and account for issues related to its recently renegotiated two-year healthcare provider contract with Columbia HCA (NYSE: COL).The threat of higher costs ruining what many had expected to be a profitable spring in HMO-land tore through the hyper price-sensitive managed care industry today like an outbreak of the Ebola virus ravaging a small African village. United HealthCare (NYSE: UNH) lost $6 to $44 11/16, Wellpoint Health Networks (NYSE: WLP) dropped $5 1/4 to $69 7/8, PacifiCare (Nasdaq: PHSYB) slid $6 7/16 to $61 5/16, and Foundation Health (NYSE: FHS) slipped $15/16 to $11 1/16.
Shares of Goody's Family Clothing (Nasdaq: GDYS) lost their spring glow today, falling $3 7/16 to $8 17/32 after the retailer of moderately priced family apparel warned that Q1 earnings will come in "significantly lower" than the $0.22 per share reported in the year ago period. The company reported that sales for March increased 14.4% to $111.8 million on a comp-store sales gain of 2.7%. For the first two months of the quarter, revenue rose 14.6% to $173.9 million on a 1.8% boost in same-store sales. In this case, though, same-store sales figures just can't tell the story. The powerful Easter selling season fell one week earlier this year, benefiting March rather than April. Given that, same-store sales actually remained weak, following up on a 4.7% decline in Q4. Despite the stalled growth recently, Goody's may still have some goodies in store for investors willing to take a closer look at the company, as detailed in today's Fool Plate Special.
QUICK CUTS: X86 chipmaker Advanced Micro Devices (NYSE: AMD) dropped $5/8 to $15 9/16 after warning -- for the third time in just over two months and a mere week before its scheduled Q1 earnings release -- that shipments of its K6-2 processors during the current quarter will come in below expectations, this time "substantially below plan"... Specialty hot teas maker Celestial Seasonings (Nasdaq: CTEA) was dunked for a $3 7/16 loss to $17 5/16 after saying fiscal Q2 will be $0.28, down from last year's $0.38 and below analysts' expectations of $0.41... Predictive software firm HNC Software (Nasdaq: HNCS) tanked $11 23/32 to $15 1/2 after warning that a revenue and profit shortfall at its insurance solutions group will result in Q1 EPS between $0.15 and $0.17 (excluding amortization expense), missing the First Call mean estimate of $0.22.
Floorcoverings retailer Maxim Group (NYSE: MXG) was shellacked $1 1/4 to $8 after Merrill Lynch reduced its near-term rating on the stock to "neutral" from "buy"... Telecommunications operation support systems provider Architel Systems Corp. (Nasdaq: ASYCF) dropped $8 3/4, or 48.6%, to $9 1/4 after saying that under a restructured contract with number-one client ICG Communications (Nasdaq: ICGX), the company will stop providing professional services to ICG. Architel had originally expected to realize $20 million in fiscal 1999 revenues from providing services to ICG; it now is expecting half that amount... Wound treatment programs operator Curative Health Services (Nasdaq: CURE) was cut $2 1/4 to $9 1/2 after receiving a subpoena for documents about its business operations and practices from the Department of Health and Human Services' inspector general.
TV and radio station operator Sinclair Broadcast Group (Nasdaq: SBGI) slid $3 5/16 to $11 1/16 after News Corp.'s (NYSE: NWS) Fox Network asked its affiliates, including stations owned by Sinclair, to each give back 20 weekly prime time commercial spots to Fox. Sinclair could buy the spots back and receive 75% of the average revenues of 15 additional spots in exchange for $10 million, the company said... Enterprise network security and management software company Network Associates (Nasdaq: NETA) lost another $1 1/4 to $14 3/4 after a Q1 earnings warning sent the company's shares reeling 27% yesterday... Supply chain execution systems provider Manhattan Associates (Nasdaq: MANH) dropped $1 1/8 to $8 1/8 after Everen Securities discontinued coverage of the firm due to an "inability to communicate with management," according to Reuters.
Since I can't seem to come up with any unified theories of how the world works today, I thought I'd hit you with some random thoughts on a couple topics.
1. Cable modems and xDSL
It's easy to see that xDSL is a superior choice to cable modems, based on technical merits. The shared bandwidth architecture of cable modems decreases the value of the network as each additional subscriber is added to the loop. This is a reverse network effect, which is a very bad circumstance. Metcalfe's Law describes a positive network effect: A network's value increases by the square of the number of terminals attached to it.
Cable modems follow a bizzaro world variant of Metcalfe's Law: Each additional terminal attached to the network reduces the value of the network because each additional user reduces the average bandwidth per user. That's not made up by the additional resources each user brings to the local network, either. With negative network effects working against it, switching costs are not as high as they could be. Users will flow to another distribution medium, such as xDSL, that can deliver more utility for the same price. Put together with the fact that at present the potential reaches of DSL and cable modems are not all that different and there's no compelling argument as to why cable modems are technically a superior solution to xDSL
If I had to come up with a valuation on cable network access providers, I would take the following into account: The bizarro network effect, the lack of other technologically compelling attributes, the significant probability that regional Bell operating companies (RBOC) won't always be sleeping giants, and the forces of deregulation on RBOC assets.
2. A very good fund manager recently made a good point about the S&P 500. I believe I've mentioned the point before, but it bears repeating. The S&P 500 is not a passive market index. A passive index of the broad market is the Wilshire 5000 or maybe the Value Line composite. The S&P 500 is a low-turnover buy-and-hold portfolio that is focused in a relative few companies that have world-beating economic characteristics.
"Value" managers that dogmatically sell things when they are thought to be too expensive and cycle into beaten-down stocks, a process that I think of more as asset arbitrage and a modified greater fool's game, are not going to have a chance of beating the index if they constantly re-balance their winners and cycle into stocks that look statistically cheap. The quality of decisions is almost always going to suffer in some inverse proportion to the number of decisions a portfolio manager makes.
3. Speaking of statistically cheap things, the large Charlotte banks don't excite me as much as they used to. Not that they don't have the makings of good companies, but they constantly shoot themselves in the foot with poor retail service. I know of no companies that are as universally loathed because of their poor customer service as these. Of course, you have to put that into context. AOL had huge service problems in 1996. But that was a fairly unique and fast-growing company at the time. You can switch banks. For this reason alone, I would pay more for Wells Fargo (NYSE: WFC) or U.S. Bancorp (NYSE: USB), all else being equal, because of the customer service competition fostered between the former Norwest and First Bank.
U.S. Bank, which First Bank acquired with the successor company assuming that name, was a great customer service-oriented company on its own. You don't even have to worry about converting low-touch to high-service as you do with Wells Fargo. Even then, I think the Norwest philosophy and the retail thinking of CEO Richard Kovacevich are going to do great things for Wells Fargo. Just as the Charlotte banks grew within a certain milieu, that being the regional banking compacts that protected them from larger interstate acquirers from outside their territory, I think the competitive customer service environment in the upper Midwest shaped Norwest and First Bank Systems, now Wells Fargo and U.S. Bancorp. Given that these are still retail customer service organizations, you have to give some regard to these companies, especially U.S. Bancorp, which provides the good retail experience with ridiculously low overhead and great net interest margins.
4. Hershey (NYSE: HSY) near $50 looks a lot more interesting than when it was hanging around $60. Still, though, when you annuitize its current earnings at an equity rate of return, the extra you pay for assumed growth opportunities is large. Hershey is not Coke (NYSE: KO). Its taste is not loved around the world. Some people hate it. And confections in this country is not a fast-growth business, though a company can, of course, outgrow the industry when it can come up with a number of hits. Just because some of the huge consumer brand name companies are near their lows doesn't automatically make them cheap. At their lows, you still need to test your assumptions about the price you're paying for prospective returns. I personally believe companies like Coke or Hershey are priced like 5-year government bonds, the market is so sure of their staying power and blue chip status. Not that Coca-Cola can't outperform over a long period of time -- its economics are superb. But over ten years, it'll be a stretch for the company to outperform the S&P 500.
5. What's with the same-store sales data for March? The economy is doing well, sure, but those are big numbers. I think one of the reasons is that Easter fell early this year, pulling some planned purchasing activity into March. Here's the data from last year and from this year that may help your thinking on that.
That's it. Have a good Thursday evening.
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